t A: The role and importance of financial reporting

Par

t A: The role and importance of financial reporting

The role of financial reporting

The importance of financial rep orting

Wh

• must prepare general purpose financial reports?

2 2 3 7

Part B: The Conceptual Framework for Financial Reporting

The purpose and application of the Conceptual Framework Objectives and limitations of general purpose financial reporting 12 12 13

Part C: Qualitative characteristics of useful financial information

Fun damental qualitative characteristics Enh ancing qualitative characteristics Application of qualitative characteristics in IFRS 15 15 18 21 Par

t D: The elements of financial

statement s

Defi ning elements of financial statements

Criteria for recognising elements of financial statements Derec ognition of ass ets and li abilities

21 22 25 26

Part E: Measurement of elements of financial statements

Cost b ased and value based measures used in IFRS Pr esent va lue as a va luation techn iquie

27 27 36 Par

t F: Application of measurement principles in the IFRSs

Leases Em ployee benefits

Accounting for share based payments Inves tment property Pr ofessional judgement

Dis closures

38 38 43 48 49 51 52 MO

DULE 1: The role and importance of financial reporting

Financial reporting is a process that provides entities with an important communication tool allowing the management of an entity (preparers) to produce financial information for external stakeholders (users).The role of financial reporting p2 Ident ification of target users of financial statements is critical

Ef fective financial reporting com municates the story of the entity during the period.

The IAS B is foc used on im proving the com munication effec tiveness of fi nancial stat ements (IA SB 2016 a).

Financial reports provide information about an entity’s financial position, and the effects of transactions and other events that give rise to changes in financial position (Conceptual Framework, paras OB12–OB16).

The importance of financial reporting p3 Financial reporting is important because of the level of resources under the care of managers and the si gnificance and fi nancial im pact of the dec isions mad e by users that are bas ed on thi s in formation.

Info rmation needs of the user

The foc us of fi nancial rep orting is on the inf ormation nee ds of pr imary use rs , but this doe s not mea n that fi nancial re ports wi ll be ir relevant to othe r users .Al though the re ports ma y not be sp ecifically tail ored to mee t thei r need s, other par ties, su ch as reg ulators and me mbers of the publ ic, ma y fi nd gen eral purpos e fi nancial rep orts usef ul (Conc eptual Fr amework, par a.

OB 10).

The IASB’s approach to resolving conflicting user information needs is to seek to provide the information that wil l mee t the nee ds of the max imum num ber of prim ary users .How ever, it is note d that foc using on com mon inf ormation needs does not pr event an ent ity fr om provi ding add itional inf ormation that may be usef ul to a group of users (Conc eptual Fr amework, par a.

OB 8).

Understanding the international financial reporting standards p5 The information included in GPFSs must comply with the International Financial Reporting Standards (IFRSs) and ach ieve fai r presen tation in acc ordance with the def inition and rec ognition cr iteria in the Conc eptual Fr amework.

If a conflict is identified between provisions of an IFRS and the Conceptual Framework, the IFRS will take preced ence .

The re are two series of international accounting standards.

• The International Accounting Standards (IASs), are those standards issued from 1973 to 2001, before

the new Inte rnational Ac counting Stan dards Boa rd (I ASB) was form ed.

• International Financial Reporting Standards (IFRSs), are those standards issued under the IASB since

2001 and ref lect the cha nges in acc ounting and bus iness practi ces si nce tha t date.

Who must prepare general purpose financial reports? p7 IFRS are silent on which entities should prepare GPFRs. This matter is left to governments and regulatory agen cies.

Australia:

s292 of the Corps Act states that financial reports must be prepared by all disclosing entities, public co mpanies, large propri etary com panies and reg istered sc hemes.

PART A: The role and importance of financial reporting p2

Sec tion 296 stipulates that the report must comply with accounting standards.

In addition to formal regulations, there are examples of guidance on who should prepare reports based on professional judgment linked to the needs of external users (e.g. Statement of Accounting Concept (SAC) 1, par a.41) The objective of general purpose financial reporting is to provide useful financial information to various users to support their decision-making needs. In addition, there is a stewardship function, which involves reporting on how eff iciently and eff ectively man agement has used the res ources entr usted to it .

International initiatives to decrease financial reporting complexity p9 An ongoing criticism of financial reporting is the complexity of financial reports. Improving the communication eff ectiveness of fi nancial rep orting is a ke y foc us for the IA SB curr ently, and ther e are a grow ing num ber of ini tiatives to hel p com bat the is sue, inc

luding:

• red

ucing dif ferences in rep orting stan dards bet ween co untries

e.g.working to converge US GAAP with IFRS

• red

ucing rep orting req uirements of spe cific organis ations

e.g. small and medium-sized entities per IASB OR entities with Reduced Disclosure Requirements per the AA SB

• cate

ring to the inf ormation nee ds of mul tiple stak eholders

e.g. users wis h to mea sure perf ormance fr om a ran ge of per spectives – so the re is a lo t of non- mandatory information in annual reports which make the preparation of financial statements seem li ke compliance onl y.

IAS

B initiatives:

• Principles of disclosure – develop a disclosure standard that binds financial statements (IAS1 and

IAS 8)

• Stan

dard le vel re view of dis closure – im prove di sclosure rel ated to the res pective stan dards

• Materiality – guidance on the application of materiality (discussion on also removing overwhelming or

dis tracting immaterial inf ormation)

Financial Reporting Council, UK: introduced a forum (Financial Reporting Lab) to provide companies and in vestors with an oppo rtunity to sol ve con temporary rep orting nee ds.